EUR/GBP sticks to gains after Eurozone PMIs, remains below two-month high set on Thursday

• EUR/GBP gains some positive traction for the third successive day on Friday.
• The BoE’s surprise rate-hike pause undermines the GBP and lends support.
• The dismal German PMIs hold back bulls from placing fresh bets and cap gains.

The EUR/GBP cross attracts some dip-buying near the 0.8660 region on Friday and sticks to its modest intraday gains through the early part of the European session. Spot prices currently trade around the 0.8680 area, up for the third straight day and fifth in the previous six, albeit lack follow-through and remain below a two-month peak touched on Thursday.

The British Pound's (GBP) relative underperformance could be attributed to the Bank of England's (BoE) surprise pause on Thursday, which, in turn, is seen acting as a tailwind for the EUR/GBP cross. In fact, the UK central bank ended a run of 14 straight interest rate hikes in the wake of the recent deceleration of inflation, signs that the UK labour market is cooling and reviving recession fears. The BoE's Monetary Policy Committee voted 5-4 in favour of maintaining the main policy rate at a 15-year high level of 5.25%.

Adding to this, softer-than-expected UK macro data released today undermines the Sterling and lends additional support to the EUR/GBP cross. The UK Office for National Statistics reported that the headline Retail Sales rebounded and increased by 0.4% in August following the previous month's sharp 1.1% fall. The rise, however, was slightly below the 0.5 % growth anticipated. That said, the European Central Bank's (ECB) dovish rate decision last Thursday keeps a lid on any meaningful appreciating move for the EUR/GBP cross.

The ECB opted to hike rates for the 10th straight time, by 25 bps, taking its main rate to an all-time high level of 4%. The downgrading of CPI and GDP growth forecasts for 2024 and 2025, however, suggested that the 14-month-long policy tightening cycle could have reached its peak already. Furthermore, a private survey showed a continuous decline in German business activity for the third straight month in September and fueled worries about a deep economic contraction, suggesting that further hikes may be off the table for now.

The EUR/GBP cross, meanwhile, reacts little to the rather unimpressive Eurozone PMI prints. Nevertheless, spot prices remain on track to register gains for the third successive week, also marking the fifth week of a positive end in the previous six. Bullish traders, meanwhile, are likely to wait for a sustained strength beyond the 0.8700 round figure, nearing a technically significant 200-day Simple Moving Average (SMA), before placing fresh bets.

Technical levels to watch